How to Form a California Accountancy Corporation (CPA Corp): The Complete Guide

If you’re a licensed CPA in California looking to establish your own practice, you need to understand something critical from the outset: you cannot form an LLC. California law explicitly prohibits licensed accountants from providing CPA services through a Limited Liability Company. This isn’t a technicality or an obscure regulation—it’s a hard prohibition under California Corporations Code §17701.04(e) and Business & Professions Code §5150. The state determined that certain professions, including accounting, require a specific corporate structure with enhanced regulatory oversight.

Your options are limited to two entity types: a Professional Corporation (PC) or a Limited Liability Partnership (LLP). For most solo practitioners and small practices, the Professional Corporation—specifically, a California Accountancy Corporation—offers the best combination of liability protection, tax advantages, and operational flexibility. This guide walks you through every step of forming one, from the strategic pre-formation decisions that most attorneys gloss over, through the dual-agency approval process that trips up many CPAs, to the ongoing compliance obligations that keep your practice in good standing.

Why California Prohibits CPA Firms from Being LLCs

The prohibition stems from the Moscone-Knox Professional Corporation Act, codified in California Corporations Code sections 13400-13410. The legislature determined that professions requiring state licensure—medicine, law, dentistry, veterinary medicine, and accounting among them—should operate under a corporate structure that maintains regulatory board oversight and clear ownership restrictions.

The reasoning is straightforward: professional services involve a direct relationship of trust between the professional and the client, and the state wants to ensure that the entities providing these services are accountable to their respective licensing boards. An LLC’s flexible management structure and potentially anonymous ownership don’t align with this regulatory philosophy.

This prohibition catches many CPAs off guard. They see colleagues in other industries forming LLCs and assume they can do the same. Some even file LLC formation documents and operate for months before realizing their mistake. If you’ve already formed an LLC for your CPA practice, the cleanest path forward is to dissolve it entirely rather than attempt a conversion. Converting preserves the LLC’s history on record—why memorialize a mistaken formation when you can start fresh with the correct entity type?

The Dual-Agency Approval Process: What Makes Accountancy Corporations Different

Forming a California Accountancy Corporation involves more than just filing paperwork with the Secretary of State. Unlike a standard business corporation, your accountancy corporation must obtain licensure from the California Board of Accountancy (CBA) before you can legally practice or hold yourself out to the public as an accountancy corporation. This creates a sequential, dual-agency process that requires careful coordination.

Here’s the sequence you must follow: First, you file your Articles of Incorporation with the California Secretary of State and receive their approval. Then, with those state-approved Articles in hand, you submit your Application for Licensure to the CBA. You cannot practice public accountancy until the CBA issues your Certificate of Registration. This is where many CPAs stumble—they incorporate with the Secretary of State and assume they’re ready to open their doors. They’re not. Operating without CBA licensure exposes you to disciplinary action, potential fines, and questions about the validity of work performed during that unlicensed period.

The CBA’s licensing unit reviews your application to ensure compliance with Business and Professions Code sections 5000-5158 and the implementing regulations in Title 16 of the California Code of Regulations. They verify that your shareholders hold active CPA licenses, that your corporate name complies with the requirements, that your bylaws contain the mandatory provisions, and that you’ve selected an appropriate form of security for client claims.

Allow six to eight weeks for CBA processing once you submit a complete application. Incomplete applications get returned for correction, adding additional weeks to your timeline. Planning a January opening? You should be filing your Secretary of State paperwork no later than October, giving yourself buffer time for any issues that arise.

Pre-Formation Decisions: The Strategic Questions Most Guides Skip

Should You Even Form a California Accountancy Corporation?

Before diving into formation mechanics, evaluate whether a Professional Corporation is the right structure for your practice. The PC structure makes sense when you’re earning enough to benefit from the tax advantages (specifically, reducing self-employment tax through reasonable salary strategies), when you want the formality and credibility that comes with a corporate structure, and when you need clear liability separation between personal and business assets.

However, a PC isn’t automatically superior to remaining a sole proprietor or forming an LLP. The tax benefits only materialize above certain income thresholds—if you’re just starting out and earning modest revenue, the administrative burden and compliance costs might outweigh the tax savings. Consult with both a business attorney and a tax professional before committing to this structure.

Choosing Your Corporation’s Name

Your accountancy corporation’s name must comply with Business and Professions Code Section 5058 and Title 16 CCR Sections 12.5 and 16-19. Several requirements are non-negotiable.

First, your corporate name must include one of these designations: “Accountancy Corporation,” “A Professional Corporation,” “APC,” or “PC.” These aren’t optional stylistic choices—they’re legally required identifiers that signal to the public that you’re operating as a regulated professional entity.

Second, the name cannot be false or misleading. You may only practice under the exact name registered with the CBA, which must match your Articles of Incorporation filed with the Secretary of State. No variations, no DBAs, no trading names. If you want to use “CPA” or “Certified Public Accountants” in your firm name, the majority of owners and voting control must be held by CPAs—which you already need for compliance, so this typically isn’t an issue for properly structured corporations.

Third, don’t include misleading geographic claims or imply specialties you don’t possess. Calling yourself “International Tax Specialists APC” when you’ve never handled cross-border work invites regulatory scrutiny.

Common compliant name structures include surname-based formats like “John Smith, CPA, A Professional Corporation” or “Smith & Associates Accountancy Corporation.” Trade-name formats like “Acumen Tax & Audit APC” are permitted but must still comply with Title 16 CCR Section 12.5 naming rules. Using “& Associates” when you’re a solo practitioner raises questions about misleading representation.

Reserve your corporate name with the Secretary of State before filing your Articles of Incorporation if you’re concerned about availability. Name reservation costs $10 and holds the name for 60 days. Search existing business names through the Secretary of State’s BizFile database at bizfileonline.sos.ca.gov to identify potential conflicts.

Important distinction: if you later want to practice under a different name (perhaps you’re bringing in partners and want to rebrand), you cannot simply file a fictitious business name statement. You must amend your Articles of Incorporation with the Secretary of State, receive their approval, then file a Name Change Application with the CBA (with $150 fee) and receive CBA approval before using the new name. The CBA doesn’t issue “Fictitious Name Permits” like some other licensing boards—you practice under your registered corporate name, period.

Ownership Structure and Non-Licensee Shareholders

California allows accountancy corporations to have non-licensee shareholders under specific conditions governed by Corporations Code Section 13401.5(a) and Business and Professions Code Section 5079. This provision surprises many CPAs who assume only licensed accountants can own shares in their practice. The reality is more nuanced.

Here’s the critical rule: at least 51% of the outstanding shares AND voting power must be held by California-licensed CPAs. Non-licensees may own up to 49% of the shares, but they must qualify as “qualified persons” under the statute. Qualified persons include attorneys, enrolled agents, IRS-authorized tax practitioners, appraisers, actuaries, financial planners, and non-CPA employees who meet specific educational and experience requirements. These aren’t passive investors—they must be actively rendering services to the corporation or serving in a permitted management role.

Additional restrictions apply beyond the 49% cap. Non-licensees cannot exceed licensees in total number (regardless of percentage ownership). A corporation with three shareholders cannot have two non-licensees and one CPA, even if the CPA holds 51% of shares. The only exception is a two-shareholder corporation, which may have one non-licensee shareholder. A non-licensee shareholder cannot simultaneously serve as an officer of the corporation—they can be either a shareholder or an officer (specifically vice-president or secretary), but not both.

The majority of directors must also be licensed CPAs. This requirement ensures that professional judgment remains in the hands of licensed professionals, not business managers or outside investors.

If you’re considering bringing in a non-licensee business partner—perhaps an attorney to handle legal compliance, an enrolled agent to manage tax preparation workflow, or an operations manager with business expertise—this structure can work. But understand that the CBA scrutinizes these arrangements carefully. At initial licensure and at every renewal, you must certify that any non-licensee owner with a principal place of business in California has been informed of the rules of professional conduct applicable to accountancy firms. This certification requires a declaration signed by a licensed shareholder. It’s not a one-time checkbox—it’s an ongoing compliance obligation that you’ll repeat every two years.

The non-licensee owner also cannot control or override professional judgment. If your non-licensee business partner starts dictating audit opinions or overriding your professional determinations to maximize revenue, you’ve crossed into unlawful practice territory. The CPA must retain professional autonomy over all professional service decisions.

Single-Shareholder Corporations

If you’re forming a solo practice, California law provides simplified requirements. A corporation with only one shareholder needs only one director who must be that sole shareholder, and the sole shareholder must serve as both president and treasurer. Other officer positions (secretary, vice-president) may be held by non-licensed individuals, though this is rarely necessary in a true solo operation.

This means you can legitimately wear all the hats: sole shareholder, sole director, president, treasurer, and secretary. Your organizational meeting minutes will reflect these appointments, and your corporate records book will document your authority to act in all capacities.

Step-by-Step Formation Process

Step 1: Prepare and File Articles of Incorporation

Your Articles of Incorporation are filed with the California Secretary of State using Form ARTS-PC (Articles of Incorporation of a Professional Corporation). The filing fee is $100. If you submit in person at the Sacramento office, add a $15 counter drop-off fee for expedited handling.

The Articles must specifically indicate incorporation as a professional accountancy corporation—not a general corporation. This is why you use Form ARTS-PC rather than the standard ARTS-GS form. Your Articles will include:

The corporate name, which must comply with CBA naming requirements. The professional purpose statement indicating the corporation is formed to engage in the profession of public accountancy. The name and California street address of your initial agent for service of process (this cannot be the corporation itself). The number of authorized shares and the class of shares your corporation may issue.

You have two options for the content of your Articles: use the state-provided Form ARTS-PC with its standard provisions, or have an attorney draft custom Articles of Incorporation with additional protective provisions. The trade-off is cost versus customization. The state form is free (beyond the filing fee) and acceptable for most practices. Custom-drafted Articles can include provisions for management flexibility, indemnification of directors and officers, and other protections that the basic form doesn’t provide.

If you want the speed of online filing but desire attorney-drafted provisions, one approach is to file the basic ARTS-PC online for rapid Secretary of State approval, then file Amended and Restated Articles of Incorporation afterward to incorporate the custom provisions. This gives you the best of both worlds—quick formation with eventual customization.

Current processing times vary. Standard mail-in processing takes approximately five business days, but this fluctuates with volume. The Secretary of State’s website provides updated processing time information. For faster turnaround, expedited services are available: 24-hour service costs an additional $500 beyond the standard filing fee, while 4-hour service (same-day) costs $750.

Step 2: Obtain Your Employer Identification Number

Once the Secretary of State approves your Articles of Incorporation, apply for an Employer Identification Number (EIN) from the IRS. This is your corporation’s federal tax ID number, required for opening a business bank account, filing tax returns, and hiring employees.

You can apply online at irs.gov and receive your EIN immediately upon completion. The application is free. You’ll need your corporation’s exact legal name as it appears on the filed Articles, your California street address, and your personal Social Security Number as the responsible party.

Don’t skip this step or delay it. You cannot open a corporate bank account without an EIN, and maintaining complete separation between personal and corporate finances is essential for preserving your liability protection.

Step 3: Draft Corporate Bylaws with Required Provisions

Your bylaws govern the internal operations of your corporation—how meetings are conducted, how officers are appointed, how shares can be transferred, and how decisions are made. While bylaws aren’t filed with any state agency, they’re legally required and must contain specific provisions for accountancy corporations.

The CBA requires that your corporate bylaws contain an appropriate passage or legend referring to the restrictions set forth in California Code of Regulations Title 16, Section 75.9 and Corporations Code Sections 13406 and 13407 regarding ownership and transfer of share certificates. These sections govern who may hold shares in a professional corporation and how shares must be handled when a shareholder ceases to be licensed.

If your corporation includes non-licensee shareholders, the bylaws must also contain provisions referring to the restrictions for each non-licensee share certificate, as specified in Section 5079 of the Business and Professions Code.

Standard corporate bylaws templates won’t include these provisions. You need bylaws specifically drafted for California professional accountancy corporations. This is where many CPAs who try to handle formation themselves run into problems—they download a generic corporate bylaws template from the internet and don’t realize it lacks the mandatory professional corporation provisions. The CBA will reject your application if your bylaws don’t comply.

For comprehensive guidance on drafting compliant corporate bylaws that include all required provisions, consider using my Corporate Bylaws Generator, which accounts for professional corporation requirements.

Step 4: Hold Your Organizational Meeting

After the Secretary of State approves your Articles of Incorporation but before you apply to the CBA, hold your organizational meeting of the board of directors. At this meeting, you’ll:

Adopt the corporate bylaws. Elect your officers (president, secretary, treasurer, and any vice-presidents). Authorize the issuance of shares to your initial shareholders. Designate the corporation’s principal office address. Authorize the opening of corporate bank accounts. Ratify any actions taken by the incorporator prior to the meeting. Appoint the registered agent for service of process.

Document everything in formal meeting minutes. These minutes become part of your corporate records book and provide evidence that you’ve properly established the corporation’s governance structure. The CBA’s application packet requires information about your shareholders, directors, and officers—information that’s formalized through this organizational meeting.

If you’re a single-shareholder corporation, you’ll still document these actions in written minutes, though the “meeting” is really just you making decisions as the sole director and documenting them properly.

Step 5: Issue Share Certificates

Issue share certificates to your shareholders in accordance with your corporate bylaws and the resolutions adopted at your organizational meeting. Each certificate must comply with the restrictions in Corporations Code Sections 13406 and 13407.

Section 13406 provides that shares in a professional corporation can only be transferred to another licensed professional, to the corporation itself, or to another shareholder of the corporation. Section 13407 requires that share certificates contain a legend noting these transfer restrictions.

If any shares are issued to non-licensee shareholders, those certificates must contain additional restrictive legends as specified in Business and Professions Code Section 5079.

Maintain a stock ledger in your corporate records book showing the issuance of all shares, the name of each shareholder, the number of shares held, and the dates of issuance. This ledger must be kept current and available for CBA review.

Step 6: Select Shareholder Security for Client Claims

When you apply for CBA licensure, you must select one of three alternatives for providing security for client claims against the corporation. This requirement is outlined in Section 5154 of the Business and Professions Code and detailed in the CBA’s application packet.

Your three options are:

Alternative A: Personal Guarantee. Each shareholder personally guarantees the corporation’s obligations arising from claims by clients for negligence, wrongful acts, errors, or omissions. This is the simplest option but provides the least personal asset protection.

Alternative B: Professional Liability Insurance. The corporation maintains professional liability insurance (commonly called errors and omissions insurance or malpractice insurance) with minimum coverage amounts specified by the CBA.

Alternative C: Deposit of Cash or Securities. The corporation deposits cash, bank certificates of deposit, or United States Treasury obligations with a bank or trust company as security for client claims.

Most CPAs choose Alternative B because they need professional liability insurance anyway for business reasons. The insurance serves double duty—protecting the practice against malpractice claims while satisfying the CBA’s security requirement.

Don’t wait until the last minute to obtain insurance quotes. Work with an insurance broker familiar with CPA professional liability coverage to secure a policy that meets both your business needs and the CBA’s minimum requirements.

Step 7: Prepare and Submit CBA Application for Licensure

With your Secretary of State-approved Articles of Incorporation in hand, your corporate bylaws drafted with required provisions, your organizational meeting documented, shares issued, and your security alternative selected, you’re ready to submit your Application for Licensure as an Accountancy Corporation to the CBA.

The application packet is available on the CBA’s website under the Firm Applicants page. The CBA recommends printing out the Check Sheet included in the packet to ensure you submit a complete application. Incomplete applications are returned for correction, delaying your ability to begin practice.

Your application must include:

Completed application form signed by a licensed shareholder. Copy of your Secretary of State-endorsed Articles of Incorporation. Copy of your corporate bylaws containing the required restrictive provisions. List of all shareholders, directors, and officers with their license numbers (for licensees) and roles. Completed Shareholder Security for Claims declaration with your selected alternative. Certification regarding non-licensee owners (if applicable). Application fee of $270 made payable to the California Board of Accountancy.

Ensure that the corporation’s name on your application exactly matches the name on your Articles of Incorporation. Any discrepancy will cause rejection.

Once submitted, allow six to eight weeks for processing. The CBA’s Initial Licensing Unit may contact you with questions or requests for additional documentation. Respond promptly to avoid further delays.

Upon approval, the CBA issues your Certificate of Registration. Only then may you legally practice or hold yourself out to the public as an accountancy corporation. Post your certificate in a prominent location in your office.

Step 8: File Statement of Information

Within 90 days of filing your Articles of Incorporation, you must file a Statement of Information (Form SI-550) with the California Secretary of State. The filing fee is $25.

This form provides the state with basic information about your corporation’s officers, directors, agent for service of process, and principal business address. Unlike some other states, California requires annual (not biennial) Statement of Information filings for corporations. Mark your calendar—missing this filing results in penalties and potential suspension of your corporate powers.

You can file Form SI-550 online through the Secretary of State’s BizFile system or by mail. Online filing provides immediate confirmation and faster processing.

Step 9: Register with the Franchise Tax Board

California corporations are subject to the state’s minimum franchise tax, which as of this writing is $800 annually. Your first payment is due by the 15th day of the fourth month after you file your Articles of Incorporation. For example, if you file in January, your first franchise tax payment is due by May 15th.

Register your corporation with the California Franchise Tax Board (FTB) and set up your tax account. The FTB’s website provides detailed information on franchise tax requirements and payment methods.

Here’s an important tax advantage for corporations that doesn’t exist for LLCs: newly incorporated California corporations are exempt from the minimum franchise tax for their first taxable year. This means if you incorporate in December, you won’t owe the $800 minimum until the following year (though you’ll still owe tax on any income earned). LLCs don’t enjoy this first-year exemption—they’re hit with the $800 immediately. Factor this into your formation timing decisions.

Tax Election: S-Corporation Status

Most California CPAs elect S-Corporation tax treatment for their Professional Corporation. This election is made at the federal level by filing IRS Form 2553 within 75 days of your incorporation date (or within 75 days of the start of the tax year in which you want the election to take effect).

S-Corporation taxation provides significant advantages for professional corporations. Rather than being taxed as a C-Corporation (where profits are taxed at the corporate level and again when distributed to shareholders as dividends), S-Corporation income passes through to shareholders and is taxed only once on their personal returns.

More importantly for CPAs, S-Corporation status allows you to reduce self-employment taxes. Here’s how: you pay yourself a reasonable salary as an employee of the corporation, and on that salary you pay standard payroll taxes (Social Security, Medicare, federal and state withholding). But any additional profits distributed to you as shareholder distributions aren’t subject to self-employment tax. The key word is “reasonable”—the IRS scrutinizes S-Corporation salaries to ensure shareholders aren’t underpaying themselves to avoid payroll taxes.

California also requires a separate S-Corporation election filing with the Franchise Tax Board. California recognizes the federal S-election but imposes a 1.5% tax on S-Corporation net income (compared to 8.84% for C-Corporations). This is significantly lower than C-Corp rates, but understand that California doesn’t provide pure pass-through treatment like the federal government does.

Work with a tax professional to determine the optimal salary-versus-distribution ratio for your practice and to ensure you make both federal and state S-elections timely.

Ongoing Compliance Obligations

Biennial License Renewal with CBA

Your accountancy corporation license must be renewed every two years to retain practice rights. The expiration date is based on the month and year your application was originally approved. If approved in an even-numbered year, your license expires in that same month of each subsequent even-numbered year. If approved in an odd-numbered year, it expires in that month of each subsequent odd-numbered year.

The CBA mails renewal forms approximately two months before your expiration date. Don’t rely solely on receiving that mailing—track your expiration date independently.

The renewal fee for licenses expiring after July 1, 2024, is $400. If payment isn’t received within 30 days of your expiration date, the CBA assesses a delinquency fee of $170. More critically, your practice rights cease at expiration until you complete renewal. Operating with an expired license exposes you to disciplinary action.

At renewal, you must provide:

Signed renewal application from a current shareholder. Renewal fee. Shareholder Reporting Worksheet listing all shareholders (or equivalent list with required information). Peer Review Reporting Form (PR-1).

Pay attention to the peer review requirement. California requires accountancy firms to participate in peer review programs. Your renewal application must document compliance.

Failure to renew within five years of expiration results in cancellation of your corporation’s license. A cancelled license cannot be renewed, reinstated, or restored. You would need to reapply and go through the entire initial licensure process again.

Annual Statement of Information

Every year (not every two years—corporations file annually in California), file your Statement of Information with the Secretary of State within the applicable filing period. The fee is $25. Failure to file results in penalties and potential suspension of corporate powers.

Annual Franchise Tax

Pay your $800 minimum franchise tax to the Franchise Tax Board by April 15th each year (or by the 15th day of the fourth month after your fiscal year ends if you’re not on a calendar year). Failure to pay results in penalties and interest accruing.

If your net income exceeds a certain threshold, your actual tax liability will exceed the $800 minimum. For S-Corporations, California imposes a 1.5% tax on net income, with $800 as the minimum.

Reporting Changes to the CBA

You must notify the CBA of any changes within 30 days of occurrence. This includes:

Changes to your corporation’s street address or mailing address. Changes in shareholders (adding new shareholders or disassociating former ones). Changes to your corporation’s name.

Address or shareholder changes can be reported on firm letterhead if the corporate name isn’t changing. Name changes require a formal Name Change Application with a $150 fee and submission of your amended Articles of Incorporation approved by the Secretary of State.

The CBA takes these reporting requirements seriously. Non-compliance can trigger audits or disciplinary proceedings.

Maintaining Corporate Formalities

To preserve your liability protection, treat your corporation like a separate legal entity—because it is. This means:

Maintaining a separate corporate bank account and never commingling personal and corporate funds. Holding annual shareholder and director meetings (even if you’re the only shareholder and director) and documenting them in meeting minutes. Following your bylaws for major corporate decisions. Ensuring contracts are signed in your capacity as officer of the corporation, not personally. Keeping your corporate records book updated with minutes, resolutions, stock ledger, and copies of filed documents.

Failing to maintain corporate formalities gives creditors and litigants ammunition to “pierce the corporate veil”—a legal doctrine allowing them to reach your personal assets by arguing that you and the corporation are really one and the same. Don’t give them that opening.

Designated Licensee: Your Corporation’s Responsible CPA

Every California Accountancy Corporation must designate at least one California-licensed CPA who serves as the responsible licensee for the firm. This requirement stems from Business and Professions Code Section 5055.1 and ensures regulatory accountability.

Your designated licensee is responsible for supervising and controlling the accounting practice, ensuring compliance with CBA rules and professional conduct standards, signing attest reports (audits, reviews, compilations with attestation), and serving as the primary contact for CBA enforcement matters. This isn’t a ceremonial title—it’s a position with real legal exposure.

In a solo practice, you’re automatically the designated licensee. In multi-shareholder corporations, you must formally designate which CPA(s) hold this responsibility. The designated licensee must have their individual CPA license in active status with the CBA. If your designated licensee’s personal license lapses, expires, or faces disciplinary action, your corporation’s practice rights are jeopardized.

Each office of your accountancy corporation engaged in public accountancy practice in California must be managed by a CPA. If you open a second office location, you need a licensed CPA managing that office—you can’t have a non-licensed office manager running a satellite location autonomously.

Peer Review Requirements: Attest Services vs. Non-Attest Practices

This is where many CPAs underestimate their compliance obligations. Business and Professions Code Section 5076 requires accountancy corporations that perform attest services to participate in CBA-approved peer review programs.

What Constitutes Attest Services?

Attest services include audits, reviews, examinations of prospective financial information (forecasts and projections), and agreed-upon procedures engagements. If your corporation issues any reports expressing assurance on financial statements or other subject matter, you’re performing attest services and peer review is mandatory.

Tax preparation alone isn’t an attest service. Bookkeeping isn’t an attest service. Management consulting isn’t an attest service. But the moment you perform an audit for a nonprofit client, review financial statements for a bank loan application, or issue any report with assurance language, you’ve crossed into attest territory.

Peer Review Program Requirements

If you perform attest services, you must enroll in a CBA-approved peer review program. The two primary approved programs are the AICPA Peer Review Program (administered through state societies) and the CalCPA Peer Review Program.

Peer review occurs every three years. A qualified reviewer examines your firm’s system of quality control and reviews a selection of your attest engagements. The reviewer issues a report—pass, pass with deficiencies, or fail. You must report the results to the CBA within required deadlines.

The CBA takes peer review seriously. Your biennial corporation license renewal requires submission of the Peer Review Reporting Form (PR-1) documenting your compliance status. Failure to participate when required, or failure to report results, triggers disciplinary action and can prevent license renewal.

Non-Attest Firm Exemption

If your corporation provides only non-attest services—tax preparation, bookkeeping, consulting, forensic accounting without attest reports—you’re generally exempt from peer review requirements. However, you must affirm this exemption status to the CBA. Don’t ignore the requirement and assume exemption by default. Actively document and certify your non-attest status.

Many CPAs structure their practices specifically to avoid peer review obligations. A tax-focused practice or consulting-only firm can operate without the peer review compliance burden. But if you’re turning away audit or review engagements to avoid peer review, you’re potentially leaving significant revenue on the table. Evaluate whether the compliance cost justifies the service restriction.

Mandatory Share Redemption: Death, Disability, and Disqualification

Corporations Code Sections 13404 and 13407 impose mandatory buy-out requirements that don’t exist in standard business corporations. Your bylaws and shareholder agreements must address these scenarios.

Triggering Events

When a shareholder of your accountancy corporation dies, has their CPA license revoked or suspended, voluntarily surrenders their license, or otherwise becomes disqualified from licensure, the corporation (or remaining shareholders) must purchase that shareholder’s shares. This isn’t optional—it’s statutory mandate.

The logic is clear: if someone can no longer legally practice public accountancy in California, they cannot own shares in a professional accountancy corporation. The shares must be redeemed to maintain compliance with the 51% licensee majority requirement and overall ownership restrictions.

Valuation and Payment Terms

Your corporate documents must establish how shares will be valued upon triggering events and the payment terms for redemption. Common approaches include book value, formula-based valuation (multiple of revenue or earnings), or third-party appraisal. Without clear valuation provisions, you’re inviting disputes—especially problematic when a shareholder dies and their estate is involved.

Payment terms also matter. Can the corporation pay the full redemption price immediately, or does it need an installment payment schedule? What happens if the corporation lacks liquidity to make the required purchase? These scenarios should be contemplated in advance, not figured out during a crisis.

Life Insurance Considerations

Many accountancy corporations purchase life insurance on shareholders to fund death-triggered redemptions. If your co-owner dies unexpectedly, the insurance proceeds provide liquidity to purchase their shares from the estate. Without insurance funding, the corporation might need to borrow money or the surviving shareholders might need to personally fund the redemption—creating cash flow strain precisely when the practice is disrupted.

Structure these insurance arrangements carefully. The corporation can own the policies (entity purchase approach) or shareholders can cross-insure each other (cross-purchase approach). Each method has different tax implications. Consult with both your attorney and tax advisor when establishing these arrangements.

Professional Liability and the Limits of Corporate Protection

Here’s a reality check that disappoints some CPAs: forming a Professional Corporation does not shield you from personal liability for your own professional malpractice. If you negligently perform an audit and the client suffers damages, you’re personally liable regardless of your corporate structure.

What the corporate structure provides is liability separation between shareholders for each other’s acts. In a properly structured and maintained corporation, you’re not automatically vicariously liable for your co-shareholder’s malpractice. The corporation also provides a liability buffer for ordinary business debts—if the corporation can’t pay its rent or equipment lease, creditors generally can’t reach your personal assets (unless you’ve personally guaranteed the obligation or pierced the veil through commingling or formalities violations).

Adequate Security Requirements

The CBA requires accountancy corporations to maintain “adequate security” for client claims against the corporation. This requirement is satisfied through one of three mechanisms: professional liability insurance (errors and omissions coverage), financial responsibility demonstrated through a bond or escrow arrangement, or personal guarantees from shareholders (though this option defeats much of the liability protection purpose).

Most CPAs choose professional liability insurance because they need it for business reasons regardless. Malpractice claims can be financially devastating—defense costs alone can drain substantial resources even if you ultimately prevail. Insurance provides both the regulatory compliance and the practical protection.

If your corporation performs attest services, insurance becomes even more critical. Audit failures, even for small clients, can result in six or seven-figure liability exposure. Your insurance policy limits should reflect the risk profile of your practice—higher limits for firms performing audits, lower limits for tax-only practices.

Management Service Organizations and Fee-Splitting Prohibitions

An increasingly common structure in professional services is the Management Service Organization (MSO) model, where a separate company (often owned by non-licensed individuals) provides administrative, marketing, billing, and operational services to the professional practice in exchange for management fees. This structure is prevalent in healthcare and dental practices.

CPAs considering this model must tread carefully. California law prohibits unlawful fee-splitting with unlicensed persons. If your MSO arrangement crosses the line from legitimate administrative services into improper fee-sharing or control over professional judgment, you’re violating the Accountancy Act.

Where Legitimate MSO Arrangements Become Problematic

A properly structured MSO provides discrete administrative services—bookkeeping for the CPA firm, marketing, IT support, office management—at fair market value rates. The CPA corporation pays for services received, maintains complete control over professional decisions, and the relationship is arms-length.

The arrangement becomes problematic when the MSO’s compensation is tied to the CPA firm’s revenue as a percentage (fee-splitting), when the MSO controls client intake or case assignment, when the MSO influences professional judgment or audit opinions, or when the MSO effectively controls the CPA practice while non-licensed owners extract profits through the management company.

The CBA’s enforcement division has brought disciplinary actions against CPAs who allowed management companies to control their practices. These cases typically involve scenarios where the CPA is essentially an employee of the management company despite nominally owning the professional corporation—the CPA has no real autonomy, doesn’t control fees, doesn’t control client relationships, and serves as a licensure vehicle for an otherwise non-licensee-controlled operation.

If you’re considering an MSO arrangement, ensure the management fee is a flat fee or based on specific services provided (not revenue percentage), that you retain complete control over all professional decisions, that the MSO has no ownership interest in the professional corporation beyond what’s permitted for qualified non-licensees, and that the arrangement is properly documented as an arms-length business services contract.

Practice Privilege: Out-of-State CPAs and California Practice

Business and Professions Code Sections 5096 and 5096.21 govern “practice privilege” or “mobility” for CPAs licensed in other states who want to practice in California without obtaining a separate California license. This affects both out-of-state CPAs considering forming California accountancy corporations and California corporations wanting to employ out-of-state CPAs.

Out-of-State CPAs as Shareholders

Here’s a critical restriction many CPAs miss: an out-of-state CPA (someone licensed in another state but not California) cannot count toward the 51% licensee majority required for California accountancy corporations. The 51% rule specifically requires California-licensed CPAs.

If you’re licensed in Nevada but want to form a California Accountancy Corporation, you must first obtain California licensure (through reciprocity if your state qualifies) or register under practice privilege provisions. You cannot form a California accountancy corporation as a non-California licensee and claim compliance because you’re “a CPA” generally.

Employing Out-of-State CPAs

If your California accountancy corporation employs CPAs licensed in other states (but not California), those employees must comply with California practice privilege requirements before practicing in California. Sections 5087 and 5088 of the Business and Professions Code, along with Title 16 CCR Section 21, outline these requirements.

Practice privilege allows qualified out-of-state CPAs to temporarily practice in California without full California licensure, but restrictions apply. The CPA must hold an active license in their home state, that state must have substantially equivalent licensing requirements (education, experience, exam passage), and the practice must be limited in scope and duration.

For a permanent employee position in your California corporation, obtaining California licensure through reciprocity is the proper path. Practice privilege is designed for temporary or project-based cross-border work, not permanent employment.

Common Mistakes That Delay or Derail Formation

Filing Articles of Incorporation as a General Corporation Rather Than Professional Corporation. The Secretary of State will reject Articles for a professional accounting corporation if you use Form ARTS-GS (general stock) instead of ARTS-PC (professional corporation). The rejection notice may be confusing if you don’t realize your error.

Omitting Mandatory Bylaws Provisions. Generic bylaws templates don’t include the restrictive legends required for professional corporation share certificates. The CBA will reject your licensure application if your bylaws don’t comply.

Naming Mismatches. Your corporate name must match exactly across your Articles of Incorporation, CBA application, and all supporting documents. Even minor discrepancies (punctuation differences, abbreviations) cause rejection.

Attempting to Operate Before CBA Approval. Secretary of State filing creates your corporation’s legal existence, but it doesn’t authorize you to practice public accountancy. You need CBA licensure first.

Missing the Statement of Information Deadline. You have 90 days from filing your Articles to submit Form SI-550. Miss this deadline and you face penalties.

Not Making Timely S-Election. The 75-day window for IRS Form 2553 passes quickly. Miss it and you’re stuck with C-Corporation taxation for the entire year.

Underestimating Processing Times. The CBA’s six-to-eight-week timeline assumes a complete application. If you’re rejected for deficiencies, add weeks or months to your timeline. Build buffer into your launch plans.

The Financial Commitment: Understanding All Costs

Formation and first-year costs for a California Accountancy Corporation include:

Secretary of State filing fee for Articles of Incorporation: $100. CBA initial licensure application fee: $270. Statement of Information filing fee: $25. First-year minimum franchise tax: Exempt for first taxable year for corporations (unlike LLCs). Professional liability insurance: Varies by coverage, typically $1,000-$3,000+ annually for new practices. Attorney fees for reviewing/drafting documents: Varies, if you choose to engage counsel. Corporate records book and supplies: $50-$150 if purchasing a kit.

Ongoing annual costs include:

CBA biennial license renewal: $400 every two years (so $200 annualized). Statement of Information annual filing: $25. Minimum franchise tax: $800 (or 1.5% of net income if higher). Professional liability insurance: Varies. Peer review program participation: Varies by reviewer selected. Tax preparation for S-Corporation returns: Varies, typically $500-$2,000 depending on complexity.

These costs add up, but for practices generating substantial revenue, the tax savings from S-Corporation treatment typically far exceed these compliance costs.

Special Considerations for Out-of-State CPAs

If you’re a CPA licensed in another state but want to form a California Accountancy Corporation, understand the additional requirements. Section 5087 and 5088 of the Business and Professions Code, along with Title 16 CCR Section 21, govern out-of-state practice.

An out-of-state CPA wishing to practice in California must either obtain a California CPA license through reciprocity or register under practice privilege provisions. You cannot be a shareholder of a California Accountancy Corporation without holding a valid license to practice public accountancy—and “valid license” in this context means valid in California.

If you’re providing services to California clients remotely from another state, different rules may apply. Consult with both a California business attorney and the CBA directly to understand your specific compliance obligations before forming a California entity.

When an LLP Might Be Better Than a PC

While this guide focuses on Professional Corporations, recognize that a Limited Liability Partnership (LLP) is an alternative structure available to CPAs in California. An LLP might be preferable for larger practices with multiple partners who want operational flexibility and simplified profit-sharing arrangements.

In an LLP, partners report their share of partnership income on individual returns (similar to S-Corporation pass-through), but without the requirement to pay themselves salaries. However, all partnership income is subject to self-employment tax—you don’t get the self-employment tax reduction that S-Corporation distributions provide.

LLPs also require annual registration with the Secretary of State and must maintain security for claims (similar to the CBA requirement for PCs). The LLP structure is more common among larger accounting firms with multiple equity partners.

For solo practitioners and small practices, the Professional Corporation taxed as an S-Corporation typically offers superior tax treatment and clearer liability separation.

Compliance Calendar: Key Deadlines at a Glance

Formation of your accountancy corporation is just the beginning. Managing ongoing compliance requires tracking multiple deadlines across different agencies. Here’s what matters:

Within 75 Days of Formation: File IRS Form 2553 for S-Corporation election if desired. Miss this deadline and you’re stuck with C-Corporation taxation for the entire year.

Within 90 Days of Formation: File Statement of Information (Form SI-550) with Secretary of State. Failure triggers penalties.

By 15th Day of 4th Month After Formation: First California franchise tax payment due to Franchise Tax Board. For calendar-year corporations formed in January, this means May 15th.

Annually by April 15th (or 15th day of 4th month after fiscal year end): Minimum $800 franchise tax payment (or 1.5% of net income if greater) to FTB.

Annually: Statement of Information update with Secretary of State ($25 fee). Filed in the applicable filing period based on your incorporation date.

Every Two Years: CBA corporation license renewal ($400 fee post-July 2024). Expiration based on original approval month and year (even-year approvals expire in even years, odd-year in odd years).

Every Three Years (if performing attest services): Peer review cycle completion. Enroll in CBA-approved peer review program and report results timely.

Within 30 Days of Any Change: Report to CBA any changes in corporate address, shareholders, or corporate name.

Ongoing: Individual CPA license renewals for all licensed shareholders (every two years based on birth month), with 80 hours of continuing education per renewal cycle including specific subject matter requirements.

Create a compliance tracking system—whether a calendar reminder system, project management software, or old-fashioned paper calendar—to ensure nothing slips. The penalties for missed deadlines range from monetary fines to loss of practice rights to license cancellation. None of these outcomes serve your practice well.

Frequently Asked Questions

Can I convert my existing sole proprietorship to an Accountancy Corporation, or do I need to start fresh?

Starting fresh is the cleaner approach. While you technically “convert” by forming the corporation and having it take over your practice, it’s not a formal statutory conversion like converting an LLC to a corporation. You form the new accountancy corporation, obtain CBA licensure, then transfer your client relationships, contracts, and operations to the corporation. Notify clients of the change, update engagement letters, and ensure contracts are properly assigned. The sole proprietorship simply ceases operations. From a tax perspective, consult with your accountant about the tax implications of transferring assets (if any) into the corporation.

What happens if I hire a non-CPA employee—do they count as a non-licensee shareholder?

Employees and shareholders are distinct categories. You can hire non-licensed employees (administrative staff, bookkeepers, marketing personnel) without any special restrictions. The non-licensee shareholder rules only apply when someone actually owns shares in the corporation. Your receptionist is an employee, not a shareholder. But if you want to give that employee an ownership stake, then the non-licensee shareholder restrictions kick in—material participation requirement, minority ownership limitation, and the prohibition against being both shareholder and officer.

How quickly can I form my Accountancy Corporation if I expedite everything?

With 24-hour expedite service at the Secretary of State ($500 additional fee), you can have your Articles filed and returned in one business day. Add two to three days for obtaining your EIN and holding your organizational meeting. But then you hit the CBA’s six-to-eight-week processing time, and the CBA doesn’t offer expedite services. So even with maximum urgency on your end, expect roughly two months minimum from when you start to when you can legally practice. If the CBA requests additional information, add more time. The bottleneck is the CBA, not the Secretary of State.

Do I need professional liability insurance even if I select Alternative A (personal guarantee) for shareholder security?

Technically, no—that’s the point of the alternatives. But practically, yes. Alternative A means you’re personally guaranteeing the corporation’s obligations for client claims. That provides the CBA with security for client recovery, but it completely undermines your liability protection. You’re on the hook personally for malpractice claims anyway under Alternative A. Professional liability insurance protects you from financial devastation if a client sues for errors or omissions. Most CPAs need this insurance for business reasons regardless of the CBA requirement. Choosing Alternative B (insurance) satisfies both the regulatory requirement and your business protection needs simultaneously.

Can my Accountancy Corporation operate under a DBA or fictitious business name?

No. You may only practice accounting under the exact name registered with the CBA, which must match the name on your Articles of Incorporation filed with the Secretary of State. Using any name other than your registered name violates Section 5060 of the Business and Professions Code. If you want to change your practice name, you must amend your Articles of Incorporation with the Secretary of State, obtain their approval, then file a Name Change Application with the CBA ($150 fee) and receive their approval before using the new name. You cannot hold out under the new name until both agencies have approved it.

What’s the difference between peer review requirements for the CBA and my AICPA membership?

They overlap but aren’t identical. The CBA requires California accounting firms to participate in peer review programs as part of license renewal. Your firm’s peer review status must be reported on the PR-1 form submitted with your biennial renewal. The AICPA also has peer review requirements for members in certain practice areas. If you’re both a CBA licensee and an AICPA member, you need to satisfy both sets of requirements. Typically, completing one peer review through an approved program satisfies both, but confirm the specifics with both organizations. Many CPAs work with their state society’s peer review program to coordinate compliance.

If I’m the sole shareholder and I pass away or lose my CPA license, what happens to the corporation?

This is why proper planning matters. Under Section 13407 of the Corporations Code, when a shareholder of a professional corporation ceases to be a licensed professional (through death, license revocation, or voluntary surrender), the corporation or other shareholders must purchase that shareholder’s shares within specified timeframes. Your bylaws should contain provisions addressing these scenarios—requiring the corporation to buy back shares, establishing valuation formulas, and setting payment terms. Without these provisions, the corporation could face dissolution. Your corporate records should include a shareholder agreement (separate from bylaws) specifically addressing death, disability, retirement, and license loss scenarios. This isn’t just a corporate formality—it’s essential business continuity planning.

My practice only does tax preparation and bookkeeping—do I still need to enroll in peer review?

If your corporation genuinely provides only non-attest services (tax preparation, bookkeeping, payroll, consulting, management advisory), you’re exempt from peer review requirements. But you must actively affirm this exemption status to the CBA—don’t simply ignore the requirement and assume exemption by default. When you complete your biennial license renewal and submit the PR-1 form, you’ll indicate that your firm doesn’t perform attest services subject to peer review. However, the moment you perform a single audit, review, or other attest engagement, you’ve triggered peer review obligations. Many tax-focused CPAs intentionally structure their practices to avoid attest services entirely because they don’t want the peer review compliance burden. That’s a legitimate business decision, but understand you’re limiting your service offerings. If you want to provide attest services to even occasional clients, factor peer review costs and administrative burden into your business planning.

Can I bring in a business partner who’s an attorney or enrolled agent as a minority shareholder?

Yes, this is one of the specific situations where non-licensee shareholders are permitted under Corporations Code Section 13401.5(a). Attorneys, enrolled agents, and certain other qualified professionals can own up to 49% of your accountancy corporation’s shares, provided they actively participate in the firm’s business (not passive investment), they don’t exceed the number of CPA shareholders, and they don’t simultaneously serve as corporate officers if they’re shareholders. This structure can work well when you want legal expertise in-house (attorney partner handling contract review and dispute resolution) or expanded tax services (enrolled agent focusing on IRS representation and tax controversy). Document the arrangement carefully in your shareholder agreement, ensure your CBA application accurately reflects the ownership structure, and be prepared to certify at each renewal that non-licensee owners have been informed of professional conduct rules. The CBA scrutinizes these multi-disciplinary arrangements to ensure CPAs maintain professional autonomy and control.

Is it legal for me to have a separate management company handle my firm’s billing and marketing in exchange for a percentage of revenue?

This structure raises serious red flags and likely violates fee-splitting prohibitions under the Accountancy Act. When a management company’s compensation is calculated as a percentage of your firm’s revenue, that’s classic fee-splitting with unlicensed persons—regardless of how the arrangement is labeled. The CBA has brought disciplinary actions against CPAs in these arrangements. A properly structured management services arrangement charges flat fees or hourly rates for specific services provided (not tied to your revenue), maintains complete CPA control over professional decisions and client relationships, has no MSO ownership interest beyond what’s permitted for qualified non-licensees, and is documented as an arms-length business services contract. If your “management company” effectively controls your practice while extracting profits through percentage-based fees, you’re essentially allowing unlicensed persons to practice accountancy through your license. That’s exactly what professional corporation requirements are designed to prevent. If you’re considering outsourcing administrative functions, structure the arrangement as fixed-fee service contracts for discrete services, not revenue-sharing partnerships.

Getting Started

If you’re ready to form your California Accountancy Corporation, begin by gathering your personal CPA license information, determining your corporate name, and deciding whether you’ll have any non-licensee shareholders. Review the CBA’s application packet thoroughly before you file anything with the Secretary of State—understanding the end requirements helps you prepare properly from the start.

Consider whether you need attorney assistance for this process. The formation mechanics aren’t insurmountable for a detail-oriented CPA who reads the requirements carefully, but mistakes create delays and complications. An attorney experienced with professional corporations can ensure your bylaws contain all required provisions, your articles include protective language beyond the minimum, and your application package is complete and compliant.

Your accountancy corporation is a significant professional and financial commitment. Take the time to do it right from the beginning. The dual-agency approval process requires patience, and the ongoing compliance obligations require discipline, but the tax advantages and liability protection make it worthwhile for CPAs building sustainable practices.

If you need legal assistance with your California Accountancy Corporation formation, want a professional review of your proposed corporate structure, or have questions about your specific situation, schedule a consultation to discuss your practice needs.

Official Resources and Primary Source Links

California Board of Accountancy
Main website: https://www.cba.ca.gov
Laws and regulations: https://www.dca.ca.gov/cba/laws_regs/index.shtml
Firm applicant forms: Available on CBA website under Firm Applicants section
Contact for questions: (916) 561-4301 or firminfo@cba.ca.gov

California Secretary of State
BizFile Online (business search and filings): https://bizfileonline.sos.ca.gov
Forms, samples, and fees: https://www.sos.ca.gov/business-programs/business-entities/forms
Current processing times: https://www.sos.ca.gov/business-programs/business-entities/processing-times

California Statutes
Business and Professions Code §§ 5000-5158 (California Accountancy Act): Available at https://leginfo.legislature.ca.gov
Corporations Code §§ 13400-13410 (Moscone-Knox Professional Corporation Act): Available at same source
Title 16, California Code of Regulations (CBA implementing regulations): Division 1

California Franchise Tax Board
Corporate tax information: https://www.ftb.ca.gov/file/business/types/corporations/index.html
Minimum franchise tax and payment information

Internal Revenue Service
EIN application: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
Form 2553 (S-Corporation election): Available at IRS.gov

Peer Review Programs
CalCPA Peer Review: https://www.calcpa.org/peer-review
AICPA Peer Review: Through state CPA societies

This guide provides general legal information about forming California Accountancy Corporations and is current as of publication date. Laws and regulations change, and the California Board of Accountancy periodically updates its requirements and forms. This information should not be construed as legal or tax advice for your specific situation. Consult with a qualified attorney and tax professional regarding your particular circumstances before making formation decisions.